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The most common methods used to assess whether stocks — including those on the FTSE 100 — are fairly valued are the price-to-earnings (P/E) ratio and the price-to-book (PTB) ratio. The former’s an earnings-based measure whereas the latter looks at a company’s balance sheet. Income investors will also consider the yield on offer.
Some number crunching
Applying these to the Footsie’s banks shows a wide variation in valuations. For example, the Lloyds Banking Group P/E ratio (trailing 12 months) is nearly twice as high as that of HSBC (LSE:HSBA). Similarly, the PTB ratio of NatWest Group‘s double that of Standard Chartered.
When it comes to dividends, there’s also a large differential. Current (26 August) yields on offer range 2.1% and 5%. The average for the index as a whole is 3.4%.
| Bank | Price-to-earnings ratio | Price-to-book ratio | Dividend yield (%) |
|---|---|---|---|
| Lloyds Banking Group | 12.7 | 1.1 | 4.0 |
| NatWest Group | 9.2 | 1.2 | 4.5 |
| Barclays | 8.4 | 0.7 | 2.3 |
| Standard Chartered | 7.0 | 0.6 | 2.1 |
| HSBC | 6.6 | 0.9 | 5.0 |
| Average | 8.8 | 0.9 | 3.6 |
Out of favour
According to the latest annual global banking review published by McKinsey & Company, “banking is the single largest profit-generating sector in the world”. And yet valuations don’t reflect their impressive financial performance.
Some of this is probably due to the unpredictable nature of their earnings. As HSBC says: “We operate in a global environment characterised by constant change and uncertainty, creating volatility in both economic forecasts and financial markets”.
In its report, the management consultancy claims that the industry has the lowest PTB (0.9) of any in the world. By coincidence, this is the average of the five banking stocks on the FTSE 100.
The MSCI World Banks index, which comprises 74 of the largest financial institutions, has a P/E ratio of 12.3 and yield of 3.6%. Of the UK’s biggest, only Lloyds has a higher earnings multiple but the quoted yield’s equal to the average of the Footsie’s five.
Broadly speaking, this suggests that – based predominantly on their earnings – the UK’s banks are modestly undervalued compared to their international peers.
A global giant
Personally, I think HSBC offers the best value. Since August 2024, the bank’s share price has risen 44%.
But this rally appears to have paused lately as its most recent results — for the six months ended 30 June (H1 25) — fell short of analysts’ expectations mainly due to problems at China’s Bank of Communications, in which it now has a 16% interest. During the period, it had to raise more money. HSBC therefore recognised $2.1bn of dilution and impairment losses in its results. It’s a reminder that the Chinese economy — and its real estate sector in particular — remains fragile.
But HSBC has an international reach. Although just under a third of its net operating income came from Hong Kong in 2024, it has 41m customers in 57 countries. Nearly 40% of its revenue is earned outside of Hong Kong, UK, US and France.
Strong and stable
However, exclude what the bank describes as “notable items” — and currency movements — and its profit before tax was 5% higher than in H1 24.
For 2025-2027, it’s targeting a return on tangible equity in the “mid-teens” (unless Trump’s tariffs disrupt the global economy). And with over $3.2trn of assets on its balance sheet, it has the financial firepower to withstand any potential headwinds better than most.
It also pays the most generous dividend of the FTSE 100’s five banks.
For these reasons, along with its attractive valuation, I think HSBC’s a stock worth considering.
